Natural justice in bank classification proceedings requires disclosure of material, effective notice, and hearing before fraud or wilful defaulter action.

Adverse classification of borrower accounts under RBI fraud and wilful defaulter frameworks requires disclosure of the material relied on, effective notice, and a meaningful hearing before final action is taken. Fraud declarations were invalid because the record did not show service of notice or opportunity to respond before the accounts were classified as fraud. Wilful defaulter orders were also invalid because the show-cause notices failed to disclose the facts and reasons forming the bank's prima facie case, and later reliance on additional grounds breached natural justice. The impugned declarations and orders were quashed, while fresh action was left open if the prescribed procedure is followed.

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Issues: (i) Whether the fraud declarations were vitiated for want of notice and hearing before classifying the loan accounts as fraud under the RBI fraud directions. (ii) Whether the wilful defaulter orders were liable to be set aside for failure to disclose the material and reasons forming the basis of the show-cause notices and for breach of natural justice.

Issue (i): Whether the fraud declarations were vitiated for want of notice and hearing before classifying the loan accounts as fraud under the RBI fraud directions.

Analysis: The fraud declarations were issued without any material showing service of notice or opportunity of hearing to the borrowers. In the governing fraud directions, and as settled by the Supreme Court, classification of an account as fraud carries serious civil consequences and cannot be made without serving notice, supplying the basis of the proposed action, and allowing a hearing. The record did not show compliance with those mandatory requirements.

Conclusion: The fraud declarations were invalid and were quashed, in favour of the petitioners.

Issue (ii): Whether the wilful defaulter orders were liable to be set aside for failure to disclose the material and reasons forming the basis of the show-cause notices and for breach of natural justice.

Analysis: Although show-cause notices were issued and personal hearings were afforded, the notices did not disclose the material or the basis on which the bank formed its prima facie view. The grounds later relied upon by the identification committee and the review committee went beyond the allegations stated in the notices. In proceedings under the RBI wilful defaulter framework, transparency requires disclosure of the relevant facts and reasons so that the noticee can answer the case effectively; absence of such disclosure renders the exercise arbitrary and contrary to natural justice.

Conclusion: The wilful defaulter orders were invalid and were quashed, in favour of the petitioners.

Final Conclusion: The impugned fraud declarations and wilful defaulter orders could not stand for breach of natural justice, but the bank was left free to recommence action by following the prescribed procedure and by supplying the necessary material before taking any fresh decision.

Ratio Decidendi: Where adverse classification under bank regulatory directions entails serious civil consequences, the decision-making authority must disclose the material relied upon, issue an effective notice, afford a meaningful hearing, and pass a reasoned decision before finalising the adverse classification.

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